Equity release is ready to step in when pensions fall

7 June 2010

After the protracted political wrangling we now have our first coalition government since 1945, with a formal agreement between the Conservatives and Liberal Democrats.

Not natural political allies, both parties have had to compromise on key issues to come to a workable agreement.

So what do we make of the policy announcements made by the government so far, what positions did the parties take in their mean for equity release?

The coalition has expressed a commitment to public sector pensions reform, announcing the establishment of an independent commission to review their long-term sustainability and affordability.

Realistically, this will mean that public sector pensions will be substantially cut, leaving many of the 5.8 million public sector employees in the country with a choice between delaying their retirement and a lower accrual rate.

But a third option could point in the direction of equity release which would allow public sector workers to retire at an earlier age than would otherwise be possible, or simply to bolster their weekly payments to ensure a comfortable standard of living.

Political conditions seem to be favourable for continuing strength in the equity release market

With cuts affecting the pensions of 20% of the workforce the equity release market could soon become a central pillar of retirement funding.
In an effort to forge a deal with the Lib Dems the Tories had to compromise on some of their pre-election promises, which means that some policies which could have been expected under a majority Tory government will not be implemented now.

One such pledge was to raise the Inheritance Tax threshold to £1m. This idea has now been shelved indefinitely.

Of course, this means equity release will continue to be a useful tool to mitigate IHT liability, with many homes still above the £325,000 threshold, further ensuring the resilience of the market.

Another promise the Tories have moved away from is the proposed scrapping of the Financial Services Authority.

In their manifesto they pledged to do away with the FSA, passing on many of its regulatory powers to the Bank of England.

Now, while the FSA will consult with the Bank it will continue to provide everyday supervision of individual lenders, maintaining the regulation that is vital to the quality of equity release advice and the continuing strength of the market.

Iain Duncan-Smith has been made secretary of state for work and pensions in the new administration and I await his ideas on long-term care and addressing the pensions deficit with interest.

Strong government backing for equity release could address both issues and would go a long way towards promoting it as a mainstream retirement option.

While the piecing together of a coalition government has ended the political confusion and allowed the announcement of early policies much remains unclear and is likely to remain this way until the emergency Budget.

What is clear is that on the face of it conditions are favourable for continuing strength in the equity release sector.

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